Raj Thamotheram: Who’s right? CalPERS or 350.org?

Weighing the pros and cons of divestment.

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CalPERS – one of the asset owners most active on climate risk – has rejected divestment. Several colleagues have asked me “which side am I on?” My friend Rob Lake tells me questions can be more valuable than answers, so in that vein here are some questions for both sides in this debate.

Questions for advocates of divestment
1. Divestment is focused on the supply of fossil fuels. Without big reductions in demand (ie by users of fossil fuels), what are the chances of supply being reduced?
2. Should investors also divest from heavy users of fossil fuels? And major enablers of high carbon economy (e.g. finance )? What’s the best strategy for non-fossil fuel sectors?
3. Who would need to do what for divestment supporters to also embrace focus on heavy demand sectors as passionately as they support divestment?
4. Divestment means switching ownership of greenhouse gas emissions from one investor to another. Index funds (eg Vanguard) get more influence (as has happened in tobacco companies or if the divestment campaign is really successful and the companies delists, private equity investors (eg Koch Brothers) may take control. Both are much harder to influence and responsible/activist investors also have less sway given they are no longer owners. Is this a good enough outcome?
5.What can fossil fuel companies do which would satisfy divestment campaigners? Campaigners generally target one or a few companies, not the whole sector: is this a good enough strategy to manage systemic risk? And how do campaigners propose to manage “first mover” risks? (eg the US utility energy company NRG where the former CEO, a climate change advocate, was “let go off” by investors and board members).
6. If large investors do seriously divest from fossil fuels, to manage benchmark risk, and because of the large amounts involved (green investments cannot soak up these amounts today) they would need to go overweight in energy utilities. Is this a good enough outcome?
7. In terms of its core objective (ie reducing the political influence of the fossil fuel companies and creating greater public interest) the divestment movement seems to have had more success in some countries (eg Netherlands) than in others (eg USA). Why? Can the polarisation at the core of most divestment campaigns, unintentionally and inadvertently, result in the fossil fuel sector actually gaining political influence?
8. Would divestment of the banking sector ahead of Global Financial Crisis by the kind of funds that are divesting from fossil fuel companies today have protected against systemic risk? Would large investors have followed? If these activist small investors had been assertive about, for example, disclosure of risk and changes to pay, could big investors – who would have ignored calls to divest – been forced to get off the fence?

Questions for advocates of “constructive engagement”
1. Investors have done constructive engagement for years. What’s the evidence that this type of engagement will be able to bend the curve of GHGs by 2020? In the absence of strong evidence of this kind, is it responsible to continue with a strategy which we have pretty good evidence is not fit for purpose?2. What are the ways that a 2°C scenario analysis be gamed by a corporation that doesn’t want to change? Are investors willing to challenge weak reporting when this happens (eg Chevron)? How does reporting on scenario analysis support business model transformation when it’s a company that doesn’t have any real intention of fundamental change?

3. Current efforts at collaboration generally target the biggest companies in the sector but many others are not covered. Is this a good enough strategy to manage systemic risk? And how do investors propose to manage “first mover” risks? (Eg the US utility energy company NRG where the former CEO, a climate change advocate, was “let go off” by investors and board members).

4. Most engagement is by fund managers and the big managers have a lot of influence – looking at the companies that faced 2°C resolutions in 2016, 9 out of the top 10 fund managers are US commercial firms. Given major conflicts of interests, how do asset owners ensure this isn’t just box ticking? Have climate aware clients of the #Missing60investors done all they reasonably can to ensure that their service providers do what’s needed in 2017?
5. Constructive engagement is private. Even if successful, other market players won’t be aware of the commitments being made until the company chooses to report on outcomes. How effective is such private dialogue in transforming market sentiment? And if sentiment doesn’t change, with even successful companies like Unilever coming under investor pressure to focus on short-term shareholder value, how likely is it that we will see investor support for business model transformation in the heavy carbon sectors?
6. Several heavy carbon companies have had climate aware directors (eg Shell had a chairman who was very vocal on these issues) without it causing major changes in the business model. What evidence is there that such a climate aware director, who is selected by the company, can cause transformation?
7. If investors are willing to actually vote against board directors on grounds of their lack of climate understanding, why are they not also willing to join other investors to ask for a 2°C transition plan, so the board know investors – as a group – want to see such plans and it’s not just a private hobby horse of a lone climate savvy director? How is this a “more aggressive” ask than voting against a board director?
8. Activist hedge funds demand that target companies develop new strategies and asset owners routinely invest in such funds. So why are investors so nervous about asking for 2°C transition plans? What will investors tell their grandchildren they did to head off the worst of climate change? What precisely are investors willing to do which is different from what they have done to meet the call for radical collaboration and bending the GHG curve by 2020?
If you have answers to these questions or would like to suggest other questions, please contribute here or send me an email. And thanks to those who have contributed – I won’t embarrass you by name! Questions reflect one’s worldviews – in this case, my judgement that forceful stewardship is the optimal strategy for managing systemic risk. I won’t complicate this posting by going into the case for forceful stewardship – for now, let’s focus on the pros and cons of the two options that currently dominate the debate.

Raj Thamotheram is an independent strategic adviser, CEO of Preventable Surprises and a visiting fellow at the Smith School, Oxford University.